Hungary Can Amend Terms of Foreign-Currency Loans, Court Rules

By Zoltan Simon and Andras Gergely -
Mar 17, 2014

Hungarian lawmakers can
retroactively amend the terms of some loan contracts, the
Constitutional Court said in response to a government request
concerning about $15 billion in foreign-currency mortgages.

Private contracts can be amended by lawmakers under
“extraordinary circumstances” involving a large number of
similar cases and where one party’s interest is
disproportionately hurt by changed circumstances, Constitutional
Court President Peter Paczolay said today in Budapest.

“Contracts can be retroactively amended only in
extraordinary cases when circumstances changed significantly in
a way that couldn’t have been foreseen at the time of the
contract’s signing,” Paczolay said at the public announcement
of the ruling. “The changes must be made by taking into account
the interests of both parties as much as possible.”

Prime Minister Viktor Orban, who faces elections on April
6, has said he wants to phase out household foreign-currency
loans and help borrowers struggling to repay mostly Swiss franc-based mortgages following a drop in the forint. The cabinet in
November postponed a decision on helping borrowers, citing the
lack of legal clarity.

The forint, which has plunged 43 percent against the Swiss
franc since mid-2008, weakened 0.2 percent to 312.66 per euro by
11:52 a.m. in Budapest, extending its loss this year to 4.9
percent. OTP Bank Nyrt., the country’s largest lender, rose 2.2
percent to 3,702 forint.

$7.7 Billion

Hungarians held 1.75 trillion forint ($7.7 billion) of
mortgages at the end of January and an additional 1.6 trillion
forint in foreign-currency home-equity loans, which can be used
for purchases other than housing, according to central bank
data. In 2011, Orban forced banks to swallow $1.7 billion in
losses on early repayment of some mortgages at below-market
exchange rates.

Lawmakers, if they choose to amend private contract terms,
must be able to prove the need for such a step and the
Constitutional Court can rule on its validity, Paczolay said.

The supreme court, known as Kuria, rejected a blanket
invalidation of these loans in December while an adviser to the
European Court of Justice said Feb. 12 that local courts can
force banks to replace unfair contract terms for customers The
government has said it would wait a decision by the Kuria, which
is awaiting an official EU ruling.